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The Biggert-Waters Flood Insurance Reform Act (BW-12) was passed by Congress in 2012. On March 21, 2014, President Obama signed the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA-14), temporarily halting implementation of some – but not all – of the provisions of BW-12. It also added new provisions, such as an increased deductible option of up to $10,000, to name one item. What follows is a brief background on the “why and what” of BW-12 and HFIAA-14. It is not a comprehensive explanation of all of the provisions of these two Acts. Every home- and business- owner must consult their Write Your Own Insurance Professional to learn the best coverage for their individual property based on their unique circumstances.

FEMA does NOT recommend cancelling an insurance policy. Cancelling flood insurance may cause policyholders to lose important discounts on their rate if they reinstate in the future.

In September 1965, Betsy, a Category-4 Hurricane, wreaked havoc to the Gulf Coast states primarily, but its effects were felt as far north as the Ohio Valley; it was the nation’s first billion-dollar hurricane. Betsy and other flood disasters led to the creation of the National Flood Insurance Program (NFIP) in 1968. Under this Federal program, homeowners could purchase flood insurance if the community adopted floodplain ordinances and met minimum standards for new construction. Existing buildings did not have to meet the new code, and many received, and continue to receive to this day, subsidized rates.

Fast forward to hurricanes in this century, like Katrina in 2005 and Tropical Storm Sandy in 2012, and we find FEMA about $25 Billion in debt. BW-12 was an attempt by Congress to make FEMA solvent by recalculating flood insurance rates for subsidized properties to reflect their actual risk and discontinuing “grandfathering.” Nationwide, about 19% of all NFIP policies are subsidized. Under BW-12, of that 19%, 10% are primary residences that would have retained their subsidies until the house was sold to a new owner. Or, if a subsidized policy were allowed to lapse, the new policy would not be issued at a subsidized rate. Only 5% of subsidized policy holders - those for non-primary residences, businesses, or Severe Repetitive Loss (SRL) properties, would see a 25% increase annually in their premiums until the true risk value was reached.

When the media published stories that focused on a few rare cases wherein premiums could exceed $20,000 in very high risk coastal zones with structures below the BFE, the hue and cry that followed prompted Congress to reconsider implementing all of BW-12. HFIAA-14 repeals and modifies certain provisions of BW-12, but some remain and will be implemented.

Subsidized Policies

A subsidized policy is one that does not reflect the true cost of the risk. It is available for homes and businesses in the Special Flood Hazard Area (SFHA) built before a community’s Flood Insurance Rate Map (FIRM) became effective and for which there is no Elevation Certificate (EC). (The effective date of Flagler Beach’s FIRM is May 15, 1985.) FEMA expects to pay more in claims on a subsidized policy than it receives in premiums. In most years, FEMA is able to satisfy all claims with the premiums collected. Post-FIRM policies are used to offset losses on Pre-FIRM policies.

Some subsidized policy holders may stand to benefit from acquiring an EC, as the table below demonstrates.

Lowest floor of property relative to the BFE:

Subsidized Rate BEFORE BW-12

Premium Rate AFTER BW-12

4 feet below BFE

$3,600

$10,723

AT BFE

$3,600

$1,815

4 feet above BFE

$3,600

$ 553

This scenario is for a single-story home in an AE Zone with no basement, crawlspaces, or enclosures. Rates are based on a policy with a $1,000 deductible, $250,000 building coverage, and $100,000 contents coverage. Source: FEMA, April 2013

Phased–In Rate Increases for Subsidized Policies

Under BW-12, not all rate changes were to have taken place immediately. Subsidized policies would be increased at a rate of 25% per year until the full risk rate is achieved for:

Non-primary residences;

Businesses;

Severe Repetitive Loss Properties; and

Any property for which cumulative amounts of claims payments exceeded the fair market value.

FEMA defines a non-primary residence as “for rating purposes only, a building that will not be lived in by an insured or an insured’s spouse for more than 50% of the 365 days following the effective policy date.” HFIAA-14 modifies this by requiring gradual rate increases of no less than 5% until full risk rate is achieved. Businesses will not have to start paying the 25% increase until 2015-2016. Some policy holders who paid higher premiums under BW-12 are now eligible for refunds.

Under BW-12, there were triggers that could result in an immediate elimination of a subsidized policy:

The property is sold, with the new owner paying the full rate;

The policy lapses;

A new policy is purchased; or

The owner refuses to mitigate a Severe Repetitive Loss Property.

HFIAA-14 allows the subsidized policy to transfer from seller to buyer. However, if the buyer’s risk profile differs, the policy may have to be re-rated. For example, the buyer might not use the house as his primary residence, but the subsidized policy could continue.

HFIAA-14 SurchargeHFIAA-14 also introduces a new mandatory surcharge on all new and renewed policies that will take effect on April 1, 2015, in the following amounts:

This surcharge fee will be included on all policies, including full-risk rated policies, until all Pre-Firm subsidies are eliminated.

Reserve Fund

BW-12 initiated this fund to help cover claims that exceed the annual premiums collected. All policies will increase by 15%, except for Preferred Risk Policies which will increase by 10%. (A Preferred Risk Policy offers reduced rates for structures outside the SFHA.) This will not change under HFIAA-14, but the increases will be phased in over time.

Grandfathering

When a community’s FIRM is updated, flood zone boundaries may change. Homes that transitioned from a non-SFHA into a SFHA were grandfathered in, and their policies continued to be based on the older zone and elevation. BW-12 would phase out the grandfathered policies and increase the rate over a period of 5 years until it reflected true risk. HIFAA-14 restored grandfathering. Grandfathered policies are also subject to the HFIAA Surcharge and Reserve Fund Assessment.

Flagler Beach Statistics

Insurance data as of December 31, 2012, indicated 2,100 policy holders in the City of Flagler Beach. Of that total, there were 27 subsidized single-family residences or condo unit owners categorized as “non-primary,” and three businesses. There were 50 subsidized homes subject to the “trigger” of change of ownership. There are no SRL properties. Substantial Improvement / Substantial Damage

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